Continued: Biotech's third wave

In February, officials asked executives at Segetis Inc. in Golden Valley if they could host a news conference by Dan McElroy, commissioner of the Minnesota Department of Employment and Economic Development, to release the latest state unemployment figures.

State officials didn't say why. They didn't have to.

On a day when Minnesota said it lost 13,000 jobs, pushing Minnesota's unemployment rate to a 25-year high, Segetis' new pilot production plant was pumping out "green" chemicals used in plastics, nylon, and foam -- bio-based materials that experts say could become the state's next growth industry.

Green chemistry, also known as industrial biotechnology, is often called the "third wave of biotechnology," following genetically modified crops and biofuels such as ethanol. Through chemical reactions, scientists can create new molecules that form the building blocks of non-petroleum-based materials used in everyday products such as sneakers, car seats and shampoo bottles.

"This is an area where Minnesota can play a global leadership role in everything from basic science to manufacturing, leveraging its considerable strengths in material science, engineering and processing," according to Destination 2025, a report prepared by the BioBusiness Alliance of Minnesota and Deloitte Consulting. "Minnesota's strengths can be exploited to manufacture these new materials into a myriad of new consumer products and various forms of packaging materials."

In addition to Segetis, the state is home to NatureWorks of Minnetonka, a joint venture between Cargill Inc. and Teijin Limited of Japan. The venture makes a biopolymer made from natural plant sugars.

And Draths Corp. of Plymouth is using microbiological and chemical processes to produce nylon fibers and engineered resins. Segetis and Draths are still in the prerevenue stage while NatureWorks is generating revenue.

St. Olaf College in Northfield recently opened Regents Hall, a new science and mathematics building with a focus on green chemistry, one of the first colleges in the country to specifically emphasize the field in its curriculum. "The middle of the Midwest is where we have the renewable resources like forestry and agriculture," said Segetis co-founder Olga Selifonova. "If you want to play in renewable materials, this is the place. We could be a capital of bio-based businesses. There are no barriers except investment dollars."

Draths recently raised $7.8 million in venture capital from investors like Khosla Ventures, a prominent Silicon Valley-based firm that specializes in cleantech. Khosla also funds Segetis.

Getting money from Khosla, started by Sun Microsystems founder Vinod Khosla, is a "big shot in the arm," for these start-ups, said David Quinby, managing partner of the Minneapolis office of Stoel Rives LLP, a law firm that does extensive work in renewable energy.

In 2008, the global market for chemicals dependent on industrial biotechnology totaled $95.5 billion. But that's just 7 percent of the total market for industrial chemicals, most of which are derived from fossil fuels such as oil and natural gas, according to Biotechnology Industry Organization.

Supporters say the technology can significantly reduce global warming because such materials are made from renewable feedstocks like corn, sugar cane and wood chips.

Green 'minefield'

But so far, much of this technology has failed to pan out, said Arlin Gyberg, a professor of chemistry at Augsburg College. Part of the problem is that many biotech companies fail to produce enough chemicals to make the technology commercially viable, he said.

"This whole 'green chemistry' industry is a minefield, as there are those 'start-up' companies who mostly are seeking funds to get started with no proven technology," Gyberg said.

Gyberg and student Brian Krohn helped develop a process to convert renewable feedstocks into biofuel without using much water and producing little waste. Ever Cat Fuels, a start-up founded by Augsburg alumnus Clayton McNeff, is constructing a $5 million plant in Isanti that will use this technology.

What makes Segetis compelling is that the company is actually making the stuff on a large scale, Gyberg said. In February, the company opened a pilot production plant that will produce 250,000 pounds per year of chemicals from renewable resources.

"To open a pilot plant is a very important step," Gyberg said.

Segetis CEO Jim Stoppert said the pilot plant will allow potential customers to test their technology.

The plant "proves the invention that caused the company to be built is real," Stoppert said. "We are making the products of the original vision. C'mon in. We'll show it to you. Here it is. We're making it. It's one thing to make products in our lab, to be able to make quarts of it. It's another to make drums of it."

Stoppert says he hopes to open a full-scale production facility by 2012. Hopefully by then, customers will be ready to place orders. It normally takes a year or two for customers to finalize their buying decisions.

"You don't want customers to start an approval process when you open a plant," Stoppert said. "You want to have your customers already in line so when you turn on a switch, you have someplace to ship the product."

But building a full-scale production plant takes a lot of capital, which is somewhat scarce in tough economic times, Quinby of Stoel Rives said.

Cleantech, the hottest sector is 2008, suffered the sharpest quarterly decline in venture capital money among all VC-backed industries. In the first three months of the year, venture investment in cleantech firms plummeted 84 percent to $154 million, according to the MoneyTree report by PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Financial.

Quinby says companies like Segetis will likely build plants that share space with other existing plants, preferably ones that can supply Segetis with its raw feedstocks. The recent passage of President Obama's stimulus package may also offer green chemistry companies research grants, tax credits and loan guarantees, he said.

Such guarantees would be especially useful to Segetis, Stoppert said.

"People just won't lend a young company money,'' Stoppert said. "But if you have federal loan guarantees, then people will lend you money. It's a rock-solid investment."